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ECO401 Economics Solved MCQs From Book b

The Economizing Problem1. The fundamental problem of economics implies that:a. governments must be relied upon to supply essential goods and servicesb. inflation and unemployment are unavoidablec. growing populations will deplete natural resourcesd. individuals and communities must make choices among competing alternatives(FH,vuZs)Answer: dFeedback: The fundamental economic problem is one of scarce resources relative to human wants. Such scarcity can never be eliminated; it implies we must make choices.

2. An economy that has achieved “full production” has achieved:a. Both allocative and productive efficiencyb. Allocative but not productive efficiencyc. Productive but not allocative efficiencyd. Neither allocative nor productive efficiencyAnswer: aFeedback: An economy that is both producing the goods and services most desired by society (allocative efficiency) and is producing them at lowest cost (productive efficiency) is said to have achieved “full production.”

3. Government authorities have managed to reduce the unemployment rate from 6% to 4% in a hypothetical economy. As a result:a. the economy’s production possibilities curve has shifted outwardb. the economy has moved downward along its production possibilities curvec. the economy has moved from a point inside to a point closer to its production possibilities curved. the economy’s production possibilities curve has become steeperAnswer: cFeedback: The construction of the production possibilities curve assumes that all available resources are fully employed. A reduction in unemployment will bring the economy closer to this frontier.

4. Consider an economy that can produce either capital goods or consumer goods. If the opportunity cost of consumer goods is always 5 capital goods, then:a. the production possibilities curve is a straight lineb. the opportunity cost of capital goods is always 5 consumer goodsc. the production possibilities curve is upward slopingd. the production possibilities curve is bowed inwardAnswer: aFeedback: A constant opportunity cost implies that any increase in consumer goods always requires the same sacrifice of capital goods, in this case 5 units. In this case, the law of increasing cost does not apply and the production possibilities curve is straight line.

5. Which of the following would most likely shift the production possibilities curve for a nation outward?a. A reduction in unemploymentb. An increase in the production of capital goodsc. A reduction in discriminationd. An increase in the production of consumer goodsAnswer: bFeedback: Increased production of capital goods will create more productive resources and increase the productive capacity of the nation. A reduction in unemployment or discrimination will not increase productive capacity, but will push the nation closer to its production possibilities curve from a point inside it.

6. Margaret decides to stay home and study for her exam rather than going out with her friends to a movie. Her dilemma is an example of:a. the economic perspectiveb. marginal analysisc. allocative efficiencyd. opportunity costAnswer: dFeedback: Opportunity cost is defined as the value of the best foregone alternative. In this case, Margaret has foregone the movie in order to study.

9. A nation achieves “allocative efficiency” if:a. it produces at a point on, rather than inside, its production possibilities curveb. it produces that combination of goods most desired by societyc. all available resources are fully employedd. marginal benefit exceeds marginal cost for every possible goodAnswer: bFeedback:Allocative efficiency refers to the production of society’s most desired goods, while productive efficiency refers to the production of goods at lowest cost. Productive efficiency implies production at a point on the production possibilities curve, but not necessarily the point that society most prefers.

10. In the circular flow diagram, firms:a. receive revenue and supply resources in the resource marketb. receive revenue and demand resources in the product marketc. incur costs and demand resources in the resource marketd. incur costs and supply goods and services in the product marketAnswer: cFeedback: In the resource market, households supply resources in exchange for incomes; firms demand those resources and incur costs in acquiring them.